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Informative Advertising: Competition or Cooperation?

Author(s)
Witness Simbanegavi
Publication date
January 2006
I compare the outcome when firms semicollude on advertising to the outcome in the Grossman and Shapiro (1984) model of informative advertising. I show that advertising is lower but prices and profits are higher under semicollusion on advertising. I also show that semicollusion on advertising is detrimental to welfare. Although firms earn higher profits when colluding on advertising, fewer consumers are informed, and as a result, welfare is lower. Compared to semicollusion on price, semicollusion on advertising is not always less profitable. Hence I lend theoretical support to empirical studies that find evidence of collusion on advertising rather than price.
Publication PDF
Series title
Working Paper 033
Journal
2009, Journal of Industrial Economics, (LVII), 147-166
Classification-JEL